Marketing Channels and Value Networks
Marketing channels are sets of interdependent organizations involved in the process of making a product or service available for use or consumption. These intermediaries constitute a marketing channel (also called a trade channel or distribution channel). The producers are the set of pathways a product or service follows after production, culminating in purchase and use by the final end user.
Some intermediaries-such as wholesalers and retailers-buy, take title to, and resell the merchandise called by merchants. Others-brokers, manufacturers' representatives, sales agents-search for customers and may negotiate on the producer's behalf but do not take title to the goods, called by agents. Meanwhile others-transportation companies, independent warehouses, banks, advertising agencies-assist in the distribution process but neither take title to goods or negotiate purchases or sales called facilitators.
The Importance of Channels
A marketing channel system is the particular set of marketing channels a firm employs, and decision about it are among the most critical ones management faces. Marketing channels must not just serve markets, they must also make markets.
The channels chosen affect all other marketing decisions. The company's pricing depends on whether it uses mass merchandisers or high-quality. The firm's sale force and advertising decisions depend on how much training and motivation dealers need. In addition, channel decisions include relatively long-term commitments with other firms as well as a set of policies and procedures. Channel choices themselves depend on the company's marketing strategy with respect to segmentation, targeting, and positioning.
In managing its intermediaries, the firm must decide how much effort to devote to push versus pull marketing. A push strategy uses the manufacturer's sales force, trade promotion money, or other means to induce intermediaries to carry, promote, and sell the product to end users. Push strategy is appropriate where there is low brand loyalty in a category, brand choice is made in the store, the product is an impulse item, and product benefits are well understood. In a pull strategy the manufacturer uses advertising, promotion, and other forms of communication to persuade consumers to demand the product from intermediaries, thus inducing the intermediaries to order it. Pull strategy is appropriate when there is high brand loyalty and high involvement in the category, when consumers are able to perceive differences between brands, and when they choose the brand before they go to the store.
Channel Development
A new firm typically starts as a local operation selling in a fairly circumscribed market, using existing intermediaries. The intermediaries is apt to be limited a few manufacturers' sales agents, a few wholesalers, several established retailers, a few trucking companies, and a few warehouses. Deciding on the best channels might not be a problems, it is often to convince the available intermediaries to handle the firm's line.
When the firm is successful, it might branch into new markets and use different channels in different markets. In smaller markets, the firm might sell directly to retailers. But, in larger markets, it might sell through distributors. Meanwhile, rural areas might work with general-goods merchants and in urban areas with limited-line merchants. In one part of the country, it might grant exclusive franchises, outlets witling to handle the merchandise, international sales agents, also partner with a local firm.
In short, the channel system evolves as a function of local opportunities and conditions, emerging threats and opportunities, company resources and capabilities, and other factors. Consider some of the challenges Dell has encountered in recent years.
Hybrid Channels
Go-to-market is other name of hybrid channels in anyone area that used by successful companies multiplying now.
Companies that manage hybrid channels must make sure these channels work well together and match each target customer's preferred ways of doing business. Customers expect channel integration, characterized by features such as:
Ø the ability to order a product online and pick it up at a convenient retail location
Ø the ability to return an online-ordered product to a nearby store of the retailer
Ø the right to receive discounts and promotional offers based on total online and off-line purchases.
Understanding Customer Needs
The consumers are the king who may choose the channels they prefer based on a number of factors: the price, product assortment, and convenience of a channel option, as well as their own particular, hopping goals (economic, social, or experiential). Therefore, products, segmentation exists, and marketers employing different types of channels must be aware that different consumers have different needs during the purchase process.
Based on researchers of Nunes and Cespedes argue that, in many markets, buyers fall into one of four categories.
1. Habitual shoppers purchase from the same places in the same manner over time.
2. High-value deal seekers know their needs and "channel surf" a great deal before buying at the lowest possible price.
3. Variety-loving shoppers gather information in many channels, take advantage of high touch services, and then buy in their favorite channel, regardless of price.
4. High-involvement shoppers gather information in all channels, make their purchase in a low-cost channel, but take advantage of customer support from a high-touch channel.
Three types of shoppers: (1) Service/quality customers who cared most about the variety and performance of products in stores as well as the service provided. (2) Price/value customers who were most concerned about spending their money wisely. (3) Affinity customers who primarily sought stores that suited people like themselves or the members of groups they aspired to join.
Even the same consumer, but for instance, someone may choose to browse through a catalog before visiting a store or take a test-drive at a dealer before ordering a car online. Consumers may also seek different types of channels depending on the particular types of goods involved.
Value Networks
The company should first think of the target market, however, and then design the supply chain backward from that point. A supply chain view of a firm sees markets as destination points and amounts to a linear view of the flow. This view has been called demand chain planning. Northwestern's Don Schultz says: "A demand chain management approach doesn't just push things through the system. It emphasizes what solutions consumers are looking for, not what products we are trying to sell them." Schultz has suggested that the traditional marketing "four Ps" be replaced by a new acronym, SIVA, which stands for solutions, information, value, and access. The value network includes valued relations with others such as university researchers and government approval agencies.
A company needs to orchestrate these parties in order to deliver superior value to the target market. Demand chain planning yields several insights. First, the company can estimate whether more money is made upstream or downstream, in case it might want to integrate backward or forward. Second, the company is more aware of disturbances anywhere in the supply chain that might cause costs, prices, or supplies to change suddenly. Third, companies can go online with their business partners to carryon faster and more accurate communications, transactions, and payments to reduce costs, speed up information, and increase accuracy.
Managing this value network has required companies to make increasing investments in information technology (IT) and software. In most cases, however, companies are still a long way from truly comprehensive ERP (enterprise resource planning) systems.
Marketers, for their part, have traditionally focused on the side of the value network that looks toward the customer, adopting customer relationship management (CRM) software and practices. In the future, they will increasingly participate in and influence their companies' upstream activities and become network managers, not just product and customer managers.
The Role of Marketing Channels
Delegation is relinquishing some control over how and to whom the products are sold. But producers can often gain in effectiveness and efficiency by using intermediaries. Through their contacts, experience, specialization, and scale of operation, intermediaries make goods widely available and accessible to target markets, usually offering the firm more than it can achieve on its own
There are channel Member Functions:
· Gather information about potential and current customers, competitors, and other actors and forces in theˇ marketing environment.ˇ
· Develop and disseminate persuasive communications to stimulate purchasing.
· Reach agreements on price and other terms so that transfer of ownership or possession can be affected.
· Place orders with manufacturers.
· Acquire the funds to finance inventories at different levels in the marketing channel
· Assume risks connected with carrying out channel work.
· Provide for the successive storage and movement of physical products
· Provide for buyers' payment of their bills through banks and other financial institutions.
· Oversee actual transfer of ownership from one organization or person to another.
Channel Functions and Flows
A marketing channel performs the work of moving goods from producers to consumers. There are some functions: (physical, title, promotion) constitute a forward flow of activity from the company to the customer. Other functions (ordering and payment) constitute a backward flow from customers to the company. And (information, negotiation, finance, and risk taking) occur in both directions.
A manufacturer selling a physical product and services might require three channels: a sales channel, a delivery channel, and a service channel.
All channel functions have three things in common: firstly they use up scarce resources; the second is they can often be performed better through specialization and the third they can be shifted among channel members. When the manufacturer shifts some functions to intermediaries, the producer's costs and prices are lower, but the intermediary must add a charge to cover its work. If the intermediaries are more efficient than the manufacturer, prices to consumers should be lower. If consumers perform some functions themselves, they should enjoy even lower prices. Changes in channel institutions thus largely reflect the discovery of more efficient ways to combine or separate the economic functions that provide assortments of goods to target customers.
Market Logistics
Physical distribution has now been expanded into the broader concept of supply chain management (SCM). Supply chain management starts before physical distribution and means strategically procuring the right inputs (raw materials, components, and capital equipment); converting them efficiently into finished products; and dispatching them to the final destinations. The supply chain perspective can help a company identify superior suppliers and distributors and help them improve productivity, which ultimately brings down the company's costs.
Market logistics includes planning the infrastructure to meet demand, then implementing and controlling the physical flows of materials and final goods from points of origin to points of use, to meet customer requirements at a profit.
Market logistics planning has four steps:
1. Deciding on the company's value proposition to its customers. (What on-time delivery standard should we offer? What levels should we attain in ordering and billing accuracy?)
2. Deciding on the best channel design and network strategy for reaching the customers. (Should the company serve customers directly or through intermediaries? What products should we source from which manufacturing facilities? How many warehouses should we maintain and where should we locate them?)
3. Developing operational excellence in sales forecasting, warehouse management, transportation management, and materials management
4. Implementing the solution with the best information systems, equipment, policies, and procedures Studying market logistics leads managers to find the most efficient way to deliver value.
Market logistics would look at two superior delivery systems. The first includes ordering the software to be downloaded directly onto the customer's computer. The second system allows the computer manufacturer to download the software onto its products. Both solutions eliminate the need for printing, packaging, shipping, and stocking millions of disks and manuals. The same solutions are available for distributing music, newspapers, video games, films, and other products that deliver voice, text, data, or images. The newspaper industry, for instance, is rethinking the way it delivers the news to readers who are now becoming accustomed to getting it free over the Internet.
Integrated Logistics Systems
The market logistics task calls for integrated logistics systems (ILS), which include materials management, material flow systems, and physical distribution, aided by information technology (IT).
Market logistics encompass several activities. The first is sales forecasting, on the basis of which the company schedules distribution, production, and inventory levels. The second is production plans which indicate the materials the purchasing department must order. These materials arrive through inbound transportation, enter the receiving area, and are stored in raw-material inventory. Raw materials are converted into finished goods. The third, finished-goods inventory is the link between customer orders and manufacturing activity. Customers' orders draw down the finished-goods inventory level, and manufacturing activity builds it up. Finished goods flow off the assembly line and pass through packaging, in-plant warehousing, shipping-room processing, outbound transportation, field warehousing, and customer delivery and servicing.
Market-Logistics Objectives
Many companies state their market-logistics objective as "getting the right goods to the right places at the right time for the least cost." Unfortunately, this objective provides little practical guidance. No system can simultaneously maximize customer service and minimize distribution cost. Maximum customer service implies large inventories, premium transportation, and multiple warehouses, all of which raise market-logistics costs.
Nor can a company achieve market-logistics efficiency by asking each market-logistics manager to minimize his or her own logistics costs. Market-logistics costs interact and are often negatively related. For example:
· The traffic manager favors rail shipment over air shipment because rail costs less. However, because the railroads are slower, rail shipment ties up working capital longer, delays customer payment, and might cause customers to buy from competitors who offer faster service.
· The shipping department uses cheap containers to minimize shipping costs. Cheaper containers lead to a higher rate of damaged goods and customer ill will.
· The inventory manager favors low inventories. This increases stock outs, back orders, paperwork, special production runs, and high-cost, fast-freight shipments.
The company must then research the relative importance of these service outputs. For example, service-repair time is very important to buyers of copying equipment. Also consider competitors' service standards. It will normally want to match or exceed the competitors' service level, but the objective is to maximize profits, not sales. The company must look at the costs of providing higher levels of service. Some companies offer less service and charge a lower price; other companies offer more service and charge a premium price. They ultimately must establish some promise it makes to the market. Perhaps the king of all logistics is Wal-Mart which uses its information systems and logistics to customize the offerings inside each store to suit regional demand.
Given the market-logistics objectives, the company must design a system that will minimize the cost of achieving these objectives. Each possible market-logistics system will lead to the following cost:
M= T+ FW+ VW+ 5
Where M= total market-logistics cost of proposed system T = total freight cost of proposed system FW= total fixed warehouse cost of proposed system VW= total variable warehouse costs (including inventory) of proposed system 5 = total cost of lost sales due to average delivery delay under proposed system. Market-logistics system calls for examining the total cost (M) associated with different proposed systems and selecting the system that minimizes it. It is hard to measure 5. The company should with its network of IT systems customized for each store. It can minimize T + FW+ VW for a target level of customer service.
Market-Logistics Decisions
The firm must make four major decisions about its market logistics: (1) How should we handle orders (order processing)? (2) Where should we locate our stock (warehousing)? (3) How much stock should we hold (inventory)? (4) How should we ship goods (transportation)?
Order-to-payment cycle-that is the elapsed time between an order's receipt, delivery, and payment. This cycle has many steps, including order transmission by the salesperson, order entry and customer credit check, inventory and production scheduling, order and invoice shipment, and receipt of payment. The longer this cycle takes, the lower the customer's satisfaction and the lower the company's profits.
Some inventory is kept at or near the plant, and the rest is located in warehouses in other locations. Storage warehouses store goods for moderate to long periods of time, Distribution warehouses receive goods from various company plants and suppliers and move them out as soon as possible. Automated warehouses employ advanced material shandling systems under the control of a central computer.
Some warehouses are now taking on activities formerly done in the plant. These include assembly, packaging, and constructing promotional displays. Postponing finalization of the offering can achieve savings in costs and finer matching of offerings to demand.
Management needs to know how much sales and profits would increase as a result of carrying larger inventories and promising faster order fulfillment times, and then make a decision. Inventory decision making requires knowing when and how much to order. As inventory draws down, management must know at what stock level to place a new order. This stock level is called the order (or reorder) point. Order-processing costs for a manufacturer consist of setup costs and running costs (operating costs when production is running) for the item. If setup costs are low, the manufacturer can produce the item often, and the average cost per item is stable and equal to the running costs. If setup costs are high, however, the manufacturer can reduce the average cost per unit by producing a long run and carrying more inventories.
Order-processing costs must be compared with inventory-carrying costs. The larger the average stock carried, the higher the inventory-carrying costs.
We can determine the optimal order quantity by observing how order-processing costs and inventory-carrying costs sum up at different order levels. Companies are reducing their inventory costs by treating inventory items differently. Positioning them according to risk and opportunity. They distinguish between bottleneck items (high risk, low opportunity), critical items (high risk, high opportunity), commodities (low risk, high opportunity), and nuisance items (low risk, low opportunity). They are also keeping slow-moving items in a central location and carrying fast-moving items in warehouses closer to customers.
Transportation choices will affect product pricing, on-time delivery performance, and the condition of the goods when they arrive, all of which affects customer satisfaction.
In shipping goods to its warehouses, dealers, and customers, the company can choose among five transportation modes: rail, air, truck, waterway, and pipeline. Shippers consider such criteria as speed, frequency, dependability, capability, availability, traceability, and cost. For speed, air, rail, and truck are the prime contenders. If the goal is low cost, then the choice is water or pipeline.
Shippers are increasingly combining two or more transportation modes, thanks to containerization. Containerization consists of putting the goods in boxes or trailers that are easy to transfer between two transportation modes. Piggyback describes the use of rail and trucks; ftshyback, water and trucks; trainship, water and rail; and airtruck, air and trucks. Each coordinated mode offers specific advantages. For example, piggyback is cheaper than trucking alone, yet provides flexibility and convenience.
A contract carrier is an independent organization selling transportation services to others on a contract basis. A common carrier provides services between predetermined points on a scheduled basis and is available to all shippers at standard rates.
To reduce costly handing at arrival, some firms are putting items into shelf-ready packaging so they don't need to be unpacked from a box and placed on a shelf individually.
Organizational Lessons
The logistics system must be information intensive and establish electronic links among all the significant parties. So that, the company should set its logistics goals to match or exceed competitors' service standards and should involve members of all relevant teams in the planning process. Getting logistics right can have a big payoff.
Today's stronger demands for logistical support from large customers will increase suppliers' costs. Customers want more frequent deliveries so they don't have to carry as much inventory. They want to shorter order-cycle times, which mean that suppliers must carry high in-stock availability. Customers often want direct store delivery rather than shipments to distribution centers. Also want mixed pallets rather than separate pallets, want tighter promised delivery times, custom packaging, price tagging, and display building.
Suppliers can't say no to many of these requests, but at least they can set up different logistical programs with different service levels and customer charges. Smart companies will adjust their offerings to each major customer's requirements. The company's trade group will set up differentiated distribution by offering different bundled service programs for different customers.
Channel Levels
The producer and the final customer are part of every channel. We will use the number of intermediary levels to designate the length of a channel. Figure l5.3a illustrates several consumer-goods marketing channels of different lengths.
A zero-level channel (also called a direct marketing channel) consists of a manufacturer selling directly to the final customer. The major examples are door-to-door sales, home parties, mail order, telemarketing, TV selling, Internet selling, and manufacturer-owned stores. A one-level channel contains one selling intermediary, such as a retailer. A two-level channel contains two intermediaries. In consumer markets, these are typically a wholesaler and a retailer. A three-level channel contains three intermediaries. In the meatpacking industry, wholesalers sell to jobbers, who sell to small retailers. From the producer's point of view, obtaining information about end users and exercising control becomes more difficult as the number of channel levels increases.
Channels normally describe a forward movement of products from source to user, but there are also reverse-flow channels. These are important in the following cases: (1) to reuse products or containers (such as refillable chemical-carrying drums); (2) to refurbish products (such as circuit boards or computers) for resale; (3) to recycle products (such as paper); and (4) to dispose of products and packaging (waste products). Several intermediaries play a role in reverse-flow channels, including manufacturers' redemption centers, community groups, and traditional intermediaries such as soft-drink intermediaries, trash-collection specialists, recycling centers, trash-recycling brokers, and central processing warehousing.
Service Sector Channels
Marketing channels are not limited to the distribution of physical goods. Producers of services and ideas also face the problem of making their output available and accessible to target populations. Schools develop "educational-dissemination systems” and hospitals develop "health-delivery systems." These institutions must figure out agencies and locations for reaching a population spread out over an area. Marketing channels also keep changing in "person" marketing. Besides live and programmed entertainment, entertainers, musicians, and other artists can reach prospective and existing fans online in many ways-via their own Web sites, social community sites such as MySpace, and third-party Web sites. Politicians also must choose a mix of channels-mass media, rallies, coffee hours, spot TV ads, direct mail, billboards, faxes, e-mail, blogs, podcasts, Web sites for delivering their messages to voters. As Internet and other technologies advance, service industries such as banking, insurance, travel, and stock buying and selling are operating through new channels.
Channel-Design Decisions
Designing a marketing channel system requires analyzing customer needs, establishing channel objectives, and identifying and evaluating major channel alternatives.
a. Analyzing Customers' Desired Service Output Levels
There are channels produce five service outputs:
1. Lot size-The number of units the channel permits a typical customer to purchase on one occasion. In buying cars for its fleet, Hertz prefers a channel from which it can buy a large lot size; a household wants a channel that permits buying a lot size of one.
2. Waiting and delivery time-The average time customers of that channel wait for receipt of the goods. Customers increasingly prefer faster and faster delivery channels.
3. Spatial convenience-The degree to which the marketing channel makes it easy for customers to purchase the product. Chevrolet, for example, offers greater spatial convenience than Cadillac, because there are more Chevrolet dealers. Chevrolet's greater market decentralization helps customers save on transportation and search costs in buying and repairing an automobile.
4. Product variety-The assortment breadth provided by the marketing channel. Normally, customers prefer a greater assortment because more choices increase the chance of finding what they need.
5. Service backup-The add-on services (credit, delivery, installation, repairs) provided by the channel. The greater the service backup, the greater the work provided by the channel.
The marketing channel designer knows that providing greater service outputs also means increasing channel costs and raising prices for customers. Different customers have different service needs. The success of discount stores indicates that many consumers are willing to accept smaller service outputs if they can save money.
b. Establishing Objectives and Constraints
Marketers should state their channel objectives in terms of targeted service output levels.
They should arrange their functional tasks to minimize total channel costs and still provide desired levels of service output.
Channel objectives vary with product characteristics. Perishable products require more direct marketing. Bulky products, such as building materials, require channels that minimize the shipping distance and the amount of handling. Nonstandard products, such as custom-built machinery and specialized business forms, are sold directly by company sales representatives. Products requiring installation or maintenance services, such as heating and cooling systems, are usually sold and maintained by the company or by franchised dealers. High-unit-value products such as generators and turbines are often sold through a company sales force rather than intermediaries.
A number of other factors affect channel objectives. In entering new markets, for instance, firms often closely observe what other firms from their home market are doing in those markets.
Marketers must adapt their channel objectives to the larger environment. When economic conditions are depressed, producers want to move their goods to market using shorter channels and without services that add to the final price of the goods.
Identifying and Evaluating Major Channel Alternatives
Companies can choose from a wide variety of channels for reaching customers-from sales forces to agents, distributors, dealers, direct mail, telemarketing, and the Internet. Each channel has unique strengths as well as weaknesses. Sales forces can handle complex products and transactions, but they are expensive. The Internet is much less expensive, but it may not be as effective with complex products. Distributors can create sales, but the company loses direct contact with customers. Manufacturers' reps are able to contact customers at a low cost per customer because several clients share the cost, but the selling effort per customer is less intense than if company sales reps did the selling.
The problem is further complicated by the fact that most companies now use a mix of channels. The idea is that each channel reaches a different segment of buyers and delivers the right products at the least cost. When this doesn't happen, there is usually channel conflict and excessive cost.
A channel alternative is described by three elements: the types of available business intermediaries, the number of intermediaries needed, and the terms and responsibilities of each channel member.
TYPES OF INTERMEDIARIES A firm needs to identify the types of intermediaries available to carry on its channel work.
Sometimes a company chooses a new or unconventional channel because of the difficulty, cost, or ineffectiveness of working with the dominant channel. The advantage is that the company will encounter less competition during the initial move into this channel.
Number of intermediaries: Companies must decide on the number of intermediaries to use at each channel level. Three strategies are available: exclusive distribution, selective distribution, and intensive distribution.
Exclusive distribution means severely limiting the number of intermediaries. It's appropriate when the producer wants to maintain control over the service level and outputs offered by the resellers, and it often includes exclusive dealing arrangements. By granting exclusive distribution, the producer hopes to obtain more dedicated and knowledgeable selling.
Selective distribution relies on more than a few but less than all of the intermediaries willing to carry a particular product. It makes sense for established companies and for new companies seeking distributors.
Manufacturers are constantly tempted to move from exclusive or selective distribution to more intensive distribution to increase coverage and sales. This strategy may help in the short term, but it can hurt long-term performance.
Intensive distribution increases product and service availability but may also encourage retailers to compete aggressively. Price wars can then erode profitability, potentially dampening retailer interest in supporting the product and harming brand equity.
The terms and responsibilities consist of :
Price policy calls for the producer to establish a price list and schedule of discounts and allowances that intermediaries see as equitable and sufficient. Conditions o/sale refers to payment terms and producer guarantees. Most producers grant cash discounts to distributors for early payment. Producers might also provide distributors a guarantee against defective merchandise or price declines. A guarantee against price declines gives distributors an incentive to buy larger quantities. Distributors' territorial rights define the distributors' territories and the terms under which the producer will enfranchise other distributors. Distributors normally expect to receive full credit for all sales in their territory, whether or not they did the selling. Mutual services and responsibilities must be carefully spelled out, especially in franchised and exclusive-agency channels. McDonald's provides franchisees with a building, promotional support, a recordkeeping system, training, and general administrative and technical assistance. In turn, franchisees are expected to satisfy company standards for the physical facilities, cooperate with new promotional programs, furnish requested information, and buy supplies from specified vendors. Evaluating the Major Alternatives
Each channel alternative needs to be evaluated against economic, control, and adaptive criteria.
ECONOMIC CRI ER'A Each channel alternative will produce a different level of sales and costs. Figure 15.4 shows how six different sales channels stack up in terms of the value added per sale and the cost per transaction. For example, in the sale of industrial products costing between $2,000 and $5,000, the cost per transaction has been estimated at $500 (field sales), $200 (distributors), $50 (telesales), and $10 (Internet). In the sale of retail banking services, a Booz Allen Hamilton study shows the average transaction at a full-service branch costs the bank $4.07, a phone transaction costs 54 cents, and an ATM transaction 27 cents, but a typical Web-based transaction costs only 1 cent,30
Firms will try to align customers and channels to maximize demand at the lowest overall cost. Clearly, sellers try to replace high-cost channels with low-cost channels as long as the value added per sale is sufficient. Asset manager Vanguard's service representatives set alit to train customers to use its Web sites over the telephone. As a result, Vanguard was able to cut staff in half, an important accomplishment given that a phone call to a rep cost the company $9 versus pennies for a Web log-in.31
As anexampleofaneconomicanalysisofchannelchoices, considerthefollowing situation:
ANorth Carolina furniture manufacturer wants to sell its line to retailers on theWest Coast. The manufacturer is trying to decide between two alternatives: One calls for hiring 10 new sales representatives who would operate out of a sales office in San Francisco. They would receive a base salary plus commissions, The other alternative would be to use a San Francisco manufacturers' sales agency that has extensive contacts with retailers. The agency has 30 sales representatives who would receive a commission based on their sales.
The first step in the analysis is to estimate how many sales are likely to be generated bl'a company sales force or a sales agency. On one hand, a company sales force will concentrate on the company's products; will be better trained to sell those products; will be more aggressive because each rep's future depends on the company's success; and will be more successful because many customers prefer to deal directly with the company. On the other hand, the sales agency has 30 representatives, not just 10; it may be just as aggressive as a direct sales force, depending on the commission level; it may be better received by customers as more independent; and it may have extensive contacts and marketplace knowledge. The marketer needs to evaluate all these factors in formulating a demand function for the two different channels.
The next step is to estimate the costs of selling different volumes through each chan· nel. The cost schedules are shown in Figure 15.5. The fixed costs of engaging a sales agency are lower than those of establishing a new company sales office, but costs rise faster through an agency because sales agents get a larger commission than company salespeople.
The final step is comparing sales and costs. As Figure 15.5 shows, there is one sales level (SjJ) at which selling costs are the same for the two channels. The sales agency is thus the better channel for any sales volume below S6' and the company sales branch is better at any volume above Sa. Given this information, it is not surprising that sales agents tend to be used by smaller firms, or by large firms in smaller territories where the volume is low. DESIGNING AND MANAGING INTEGRATED MARKETING CHANNELS CHAPTER 15 423
Manufacturer's sales agency
S8
level of Sales (dollars)
CONTROL A 0 ADAPTIVE C ITERIA Using asales agency poses a control problem. Asales agency is an independent firm seeking to maximize its profits. Agents may concentrate on the customers who buy the most, not necessarily on those who buy the manufacturer's goods. Furthermore, agents might not master the technical details ofthe company's product or handle its promotion materials effectively.
To develop a channel, members must make some degree of commitment to each other for a specified period of time. Yet these commitments invariably lead to a decrease in the producer's ability to respond to a changing marketplace. In rapidly changing, volatile, or uncertain product markets, the producer needs channel structures and policies that provide high adaptability.
::: Channel-Management Decisions
After a company has chosen a channel system, it must select, train, motivate, and evaluate individual intermediaries for each channel. It must also modify channel design and arrangements over time.
Selecting Channel Members
To facilitate channel member selection, producers should determine what characteristics distinguish the better intermediaries. They should evaluate the number of years in business, other lines carried, growth and profit record, financial strength, cooperativeness, and service reputation. If the intermediaries are sales agents, producers should evaluate the number and character of other lines carried and the size and quality of the sales force. If the intermediaries are department stores that want exclusive distribution, the producer should evaluate locations, future growth potential, and type of clientele.
Training and Motivating Channel Members
A company needs to view its intermediaries in the same way it views its end users. It needs to determine intermediaries' needs and construct a channel positioning such that its channel offering is tailored to provide superior value to these intermediaries. Be able to stimulate channel members to top performance starts with understanding their needs and wants. The company should plan and implement careful training programs, market research programs, and other capability-building programs to improve intermediaries' performance. Channel power is the ability to alter channel members' behavior so that they take actions they would not have taken otherwise. Manufacturers can draw on the following types of power to elicit cooperation:
- Coercive power: A manufacturer threatens to withdraw a resource or terminate a relationship if intermediaries fail to cooperate. This power can be effective, but its exercise produces resentment and can generate conflict and lead the intermediaries to organize countervailing power.
- Reward power. The manufacturer offers intermediaries an extra benefit for performing specific acts or functions. Reward power typically produces better results than coercive power, but it can be overrated. The intermediaries may come to expect a reward every time the manufacturer wants a certain behavior to occur.
- Legitimate power. The manufacturer requests a behavior that is warranted under the contract. As long as the intermediaries view the manufacturer as a legitimate leader, legitimate power works.
- Expert power. The manufacturer has special knowledge the intermediaries value. Once the intermediaries acquire this expertise, however, expert power weakens. The manufacturer must continue to develop new expertise so that the intermediaries will want to continue cooperating.
- Referent power. The manufacturer is so highly respected that intermediaries are proud to be associated with it. Companies such as IBM, Caterpillar, and Hewlett-Packard have high referent power.33
Coercive and reward power are objectively observable; legitimate, expert, and referent power are more subjective and depend on the ability and willingness of parties to recognize them.
Most producers see gaining intermediaries' cooperation as a huge challenge. They often use positive motivators, such as higher margins, special deals, premiums, cooperative advertising allowances, display allowances, and sales contests. At times they will apply negative sanctions, such as threatening to reduce margins, slow down delivery, or terminate the relationship. The weakness of this approach is that the producer is using crude, stimulus response thinking. The manufacturer seeks distributor agreement with these policies and may introduce a compensation plan for adhering to the policies.
To streamline the supply chain and cut costs, many manufacturers and retailers have adopted efficient consumer response (EeR) practices to organize their relationships in three areas: (1) demand side management or collaborative practices to stimulate consumer demand by promoting joint marketing and sales activities, (2) supply side management collaborative practices to optimize supply (with a focus on joint logistics and supply chain activities), and (3) enablers and integrators, or collaborative information technology and process improvement tools to support joint activities that reduce operational problems, allow greater standardization, and so on.
Evaluating Channel Members
Producers must periodically evaluate intermediaries' performance against such standards as sales-quota attainment, average inventory levels, customer delivery time, treatment of damaged and lost goods, and cooperation in promotional and training programs. A producer will occasionally discover that it is paying particular intermediaries too much for what they are actually doing. One manufacturer compensating a distributor for holding inventories found that the inventories were actually held in a public warehouse at its own expense. Producers should set up functional discounts in which they pay specified amounts for the trade channel's performance of each agreed-upon service. Underperformers need to be counseled, retrained, motivated, or terminated.
Modifying Channel Design and Arrangements
A producer must periodically review and modify its channel design and arrangements. It will want to modify them when the distribution channel is not working as planned, consumer buying patterns change, the market expands, new competition arises, innovative distribution channels emerge, and the product moves into later stages in the product life cycle.
No marketing channel will remain effective over the whole product life cycle. Early buyers might be willing to pay for high-value-added channels, but later buyers will switch to lower-cost channels. Small office copiers were first sold by manufacturers' direct sales forces, later through office equipment dealers, still later through mass merchandisers, and now by mail-order firms and Internet marketers.
In competitive markets with low entry barriers, the optimal channel structure will inevitably change over time. The change could mean adding or dropping individual channel members, adding or dropping particular market channels, or developing a totally new way to sell goods.
Adding or dropping individual channel members requires an incremental analysis. What would
the firm's profits look like with and without this intermediary? A producer may drop any intermediary whose sales drop below a certain level. Increasingly more detailed customer shopping information stored in databases and sophisticated means to analyze that data can provide guidance into those decisions. Examples abound: Avon's door-to-door system for selling cosmetics was modified as more women entered the workforce. In retail banking, despite a belief that technological advances such as automated teller machines, online banking, and telephone call centers.
Channel Integration and Systems
Channel integration and systems consist of:
a. Vertical Marketing Systems
A vertical marketing system (VMS), by contrast, comprises the producer. Wholesaler(s), and retailer(s) acting as a unified system. One channel member, the channel captain, owns the others or franchises them or has so much power that they all cooperate. "Marketing Insight: The Importance of Channel Stewards" provides some perspective on how channel stewards, a closely related concept, should work.
Vertical marketing systems (VMSs) arose as a result of strong channel members' attempts to control channel behavior and eliminate the conflict that results when independent members pursue their own objectives. VMSs achieve economies through size, bargaining power, and elimination of duplicated services. There are three types of VMS: corporate, administered, and contractual.
An administered VMS coordinates successive stages of production and distribution through the size and power of one of the members. Manufacturers of a dominant brand are able to secure strong trade cooperation and support from resellers. The most advanced supply-distributor arrangement for administered VMSs relies on distribution programming, which builds a planned, professionally managed, vertical marketing system that meets the needs of both manufacturer and distributors. The manufacturer establishes a department within the company called distributor relations planning.
